2. What is Money? Flashcards
What is Money according to economists?
Narrow class of assets with 3 special functions:
- medium of exchange (primary role)
- unit of account
- store of value
What is money demand?
The amount of wealth that people choose to hold in money
What is barter?
System without money where a good or service is traded for another good of service
–> Must experience a double coincidence of wants
What is money?
Defined by what is does, not by what it is. Money is whatever people use as the medium of exchange.
What are the two categories for money
Commodity money and fiat money
What is commodity money?
Valuable good that becomes the medium of exchange. (gold, silver, grain, cigarettes, anything)
What was paper money originally?
Was a version of commodity money because it was backed by commodities. Paper money was an ownership certificate for a certain amount of gold and silver.
What is fiat money?
Money is not backed by a commodity anymore. It has no intrinsic value and is money because the government declared so. Value of money depends on supply and demand of money.
What does the Central Bank do?
Central bank controls a nation’s money supply, which is the total amount of money in an economy.
What is M1?
Primary measure of money supply.
- only money held by nonbank public
M1 = currency + checking deposits
What is liquidity?
Ease of trading an asset for money
Asset is liquid if it can be traded for money easily and inexpensively.
(Currency&checking deposits –> saving account –> securities –> real estate)
Usually a trade-off between returns and liquidity
What is M2?
Another measure of money supply. Called broad money because it includes M1 and other highly liquid assets.
M2 usually 4x than M1
M2 = M1 + saving deposits + small time deposits + retail MM mutual funds
What is a small-time deposit?
Also known as certicifate of deposit. Similar to savings deposit but they are made for a fixed period.
There is usually a penalty for an early withdrawal.
Usually smaller than $100,000
What is a Money-market mutual fund?
Mutual fund, that holds bonds with maturities less than a year.
Only retail MM mutual funds are included in M2, not institutional MM funds
Which monetary aggregate is best measure of money supply?
M1 until 1980s, but with liquid substitutes for standard checking accounts that beared higher interest rates, M2 became more useful
